“Keep it simple, stupid” – Michael G. Scott
A lot of investors, including great ones, claim investing is simple: find stocks where the discrepancy between market price and intrinsic value is so large and clear, that it’s difficult to lose money by investing in them. This camp decries large excel models and claims back of the napkin math is all you need. They take adages like “buy a dollar for 50 cents” out of context and use it to justify buying deep value stocks. I used to be in this camp, yet I’ve realized that the more obvious a dislocation in a name, the more careful you should be with it.
I’m not saying that the “obvious” ideas are necessarily bad ideas – they could still work. But a lot of the time, the market is smarter than you. Acute attention to detail is critical in investing, and the vast majority (including myself), are not equipped with this trait.
When I say, “acute attention to detail”, I mean this in the strongest possible sense. Let me explain with an example. When I worked at Madison, there was a man named Bruce that stopped by our office. Bruce is arguably the most successful private investor of all time – Greenblatt even cites him in some of his books. I noticed several traits Bruce possessed – he was unusually curious, constantly asking questions, completely unafraid of saying something “dumb.” He wanted to learn more about my (the intern’s) blog, which I had taken down at the time (hence why this blog is now password-protected…) – who talks to the intern, nevertheless goes out of his way to ask about his blog?? Curiosity aside, Bruce messaged Eli (PM) everyday asking about share price movements in a common stock they owned – Eli pointed out how annoying this was. Bruce would constantly scrutinize every share price movement, press release, and filing put out – to the point where he was perceived as extremely irritating! This OCD-esque disorder related to knowing every little detail that matters is something I do not possess, and maybe isn’t even something I can acquire, but is something I want to at least try to work towards. In cruder terminology, you need to be somewhat autistic to be a great investor – most people, including me, are not.
A trade I completely botched recently serves as a great example of the importance of attention to detail, and why the “investing is simple” camp is dead wrong. Sunshine biopharma (SBFM) is a classic GoodCo, BadCo setup – they acquired a Canadian generic pharma business for ~$20mm (the GoodCo) and have a cash-burning R&D arm (the BadCo). The company diluted shareholders into oblivion, sending the market cap to <$5mm for a profitable co w/ >$20mm in cash. There were strong, clear negative signs: lack of insider ownership and R&D burn, but there was also potential for activist involvement, improved IR, and/or a buyback. The company was undergoing a reverse split, and it was unclear how warrants would be impacted and the extent of their dilution. I skimmed the >100 page long S-1 for the offering and concluded that the exercise price could be adjusted much lower (so warrants go from far OTM to ITM), but the dilutive effect is only 20%. Not too bad for a profitable company now trading at <20% of net cash. There was a lot of confusion online about the impact of the warrants – some failed to adjust for the split and thought there would be 1000+% dilution, some checked online sources that showed the market cap of the company at $300mm and concluded this was correct. These were lazy takes. Yet my take was also lazy – I didn’t read the entire S-1, and it turns out there was a paragraph in it that explains the total exercise of the warrants will stay the same post-split. 200k warrants at $200 (post-split strike) = VWAP ($3) * x where x is the number of warrants. X ends up being ~10mm versus a share count of <1mm – 1000+% dilution! I lost maybe 50-75bps on this trade – I don’t mind losing money; the process is what matters – but the process here was terrible. I disregarded attention to detail and paid the price. The “keep it simple” camp loved this idea – nobody read the full S-1.
Another example of failed attention to detail, though luckily without an overly negative outcome, is my two seventy bio (TSVT) investment. There are infinite paradigms that you can drill into on a name – the product, management team, history, etc. – ideally, you want to know as much as possible about all these paradigms. But given a limited timeline, this isn’t necessarily possible – a good investor should home in on the paradigms that matter with respect to stock price movement and dive deep into these. In my blog post titled Kairos, I discussed ODAC and my thoughts on FDA approval for Abecma in the 3L+ setting. I watched the entire ODAC meeting, trying to get a sense of whether the FDA would end up approving Abecma. I think I did a good job at this, and Abecma was approved soon after. I did not spend a lot of time thinking about Abecma’s competition – besides Carvykti, bispecific antibodies like Teclavyi and T-cell engagers seem to be projected to take a large percentage of market share. Physicians aren’t necessarily comfortable with going straight to CAR-T therapies for the majority of patients given manufacturing delays and toxicity concerns. From the patient perspective, CAR-T is expensive and not everyone may be able to afford it. While I viewed Carvykti and Abecma as similar in terms of efficacy, it seems physicians almost universally view Carvykti as superior – my hope is that this won’t matter in the near to medium term given scaling CAR-T therapies is difficult and there will be more demand than either BMY or JNJ have the ability to fulfill on their own. But the point here is I didn’t sufficiently deep dive competitive pressures stifling Abecma’s growth (I still haven’t really) – this seems to be the key factor keeping TSVT price suppressed. The outcome here didn’t change – I still think TSVT should trade higher. But my process had flaws: I didn’t have the obsessive attention to detail on Abecma’s competition that I should have had. Maybe this is acceptable given there hasn’t been any significant developments re: competition that should matter, but being intellectually honest, in my mind, I thought FDA approval was what was keeping share price low and that was wrong.
Investing isn’t easy, but the greats make it look easy. They spend hundreds of hours reading and re-reading filings, news, notes – everything that they can get their hands on. They are constantly on guard for red flags, anxious about what they are missing – none of this shows up in their one-page writeups or 20-minute interviews. The takeaways for me?
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Attention to detail is critical – if you think you have looked at something in sufficient detail, ask yourself if you really have. You haven’t – go deeper. Allow yourself to get lost in the details, but eventually resurface and synthesize to keep yourself grounded.
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Never be complacent – true “attention to detail” involves constant scrutiny and reevaluation over time.